When Is It OK to Dip into Your Emergency Fund?

From early on in life, we are taught by our parents or readings on personal finance that having an emergency fund is critically important. The general recommendation is to maintain a cash reserve or emergency fund equivalent to 6-12 months of living expenses. In short, its purpose is to cover any unexpected expense that exceeds your ability to pay with your budget and that absolutely cannot wait.

For some people, the idea of keeping thousands of dollars in a low or no-interest account, waiting for a disaster that may never come, is difficult to fathom. Intellectually, they understand the necessity of an emergency fund, but they may have trouble maintaining a strict interpretation of an “unexpected expense.” After all, wouldn’t a sudden opportunity to buy the next generation flat screen TV at less than half the price be considered an unexpected expense? Such a deal may never come around again.

The concept of an emergency fund is grounded in much stricter parameters. If you are faced with the need to rationalize using your emergency funds, try running through a series of three critical questions.

Is it Unexpected?

Generally, it is unexpected if it’s not on the calendar or something you couldn’t have planned for. Some people might anticipate being handed a pink slip at work, but it’s difficult to know when it might happen. That’s why you have an emergency fund. Knowing when a terrible storm will wreak havoc on your house is impossible. That’s why you have insurance and an emergency fund to pay the deductible. However, it’s not an emergency when you are drastically behind on shopping three days before Christmas. It may seem like it was unexpected, but it was really just poor planning.

Is It Essential?

This gets to the core of needs versus wants. If your car is essential for getting to work and your engine blows a gasket, that’s an emergency requiring immediate access to cash funds. However, if a car stereo system blows a speaker, making listening to music on your way to work impossible, that is not an emergency. You either live with one less speaker or save your money to buy a new one.

Is it Urgent?

Generally, if it absolutely cannot wait another minute, it’s an emergency. That might include a furnace that dies at the beginning of a long snowstorm or your dog that just swallowed a tennis ball. There is no waiting or thinking about it; it needs to be fixed, and it will take money to fix it. That is what your emergency fund is for. Anything that can wait more than a day because it doesn’t immediately impact your life is not an emergency. That is what a savings account is for.